The ongoing debate on how governments should tackle the aftermath of the 2007/08 global financial crisis is not altogether new. It is in a sense a revisiting of the famous clash between two famous economists of the 20th century, Britain’s John Maynard Keynes and Austrian-born Friedrich A. Hayek, over how countries could have combated the unemployment and misery of the 1930s Great Depression.

Keynes, a brilliant Cambridge academic, believed that governments were capable of rescuing capitalism from its periodic slumps. The policy prescriptions he pioneered in the 1930s are credited by many of his followers with contributing to the Western world’s postwar golden age of economic prosperity. Hayek, by contrast, was far more sceptical of government’s capacity to manage the economy.

In this book, British journalist Nicholas Wapshott (a former senior editor at The Times of London and The New York Sun) has produced a lively and very readable study of the two men’s contributions to economic policy.

In his famous 1936 book, The General Theory of Employment, Interest and Money, Keynes offered a theoretical rationale for governments, during economic downturns, to run budget deficits — that is, to spend more than they raised in taxation.

Often overlooked, however, is that Keynes also stipulated that governments, during times of inflationary booms, should run budget surpluses.

Despite the subsequent philosophical differences between the two men, Hayek during the 1920s was a great admirer of Keynes. At the end of World War I, Keynes had denounced the victorious Allies for being indifferent to the plight of the starving populations of Germany and Austria. Hayek recalled that Keynes was “something of a hero to us Central Europeans”.

Hyper-inflation in these defeated countries wiped out the savings of the middle class, making Hayek abnormally wary of letting governments tamper with money. The rise to power of Hitler convinced Hayek of the urgent necessity to safeguard people’s freedoms by limiting the role of government.

In 1931 Hayek joined the economics faculty of the London School of Economics. Although he later took out British citizenship, his spoken English was always terrible. Wapshott says, “His Austrian accent was as thick as London smog and remained heavy for the rest of his life.”

During the war Hayek was evacuated to Cambridge, where he frequently conversed with Keynes. During the war years he wrote his famous anti-socialist book, The Road to Serfdom, in which he not only made an eloquent and heartfelt plea for limited government and free markets, but also accepted the need for some government-provided social insurance.

The Road to Serfdom was serialised in Reader’s Digest magazine and overnight made Hayek a household name in the United States.

At Christmas 1949, Hayek suddenly abandoned his wife in London for another woman. He travelled all the way to the U.S. state of Arkansas, a jurisdiction in which he was able to get a cheap “no-fault” divorce. Hayek’s LSE colleagues were scandalised, and in 1950 Hayek resigned from his post there. Lionel Robbins, formerly an admirer of Hayek, resigned in protest from the Mont Pelerin Society which Hayek had founded in 1947.

In 1960, Hayek produced a 576-page tome, The Constitution of Liberty, a more academic work than The Road to Serfdom and probably his greatest work. However, it didn’t sell well.

Hayek felt that, what with the clear ascendancy of Keynesian economics, he (Hayek) was yesterday’s man. For more than a decade he suffered bouts of serious depression.

In 1974, to his surprise, he was awarded the Nobel Prize for Economics and became a public name once more.

At about this time, the golden age of Western postwar prosperity came to a sudden halt with the emergence of “stagflation” — a combination of economic stagnation, high unemployment and inflation — for which orthodox Keynesian theory had no remedy.

Financial commentators discovered in the pages of two of Hayek’s works, The Constitution of Liberty and A Tiger by the Tail: The Keynesian Legacy of Inflation (1972), apparently accurate predictions of the then course of economic events.

The neo-classical counter-revolution against big government and Keynesian economic management had commenced. Within a few years, two of Hayek’s admirers, Britain’s Margaret Thatcher and America’s Ronald Reagan, would come to power in their respective countries, committed to rolling back the state and deregulating the market.

Has classical liberalism triumphed? Have we heard the last of Keynesian economics? Far from it.

When the global financial crisis struck the Western world during 2007/08, both Bush and Obama used Keynesian remedies in a bid to jump-start the U.S. economy. To date, however, it has not delivered the hoped-for results of lifting output and creating jobs.

Nicholas Wapshott has written a riveting study of Keynes and Hayek.

He movingly describes how the two men, during World War II, would often serve “all night together, alone, on the roof of the chapel of King’s College, Cambridge. Their task was to gaze at the skies and watch for German bombers aiming to pour incendiary bombs on the small picturesque cities of England.”

Thus Keynes and Hayek — one an Englishman, the other a German-speaking Austrian — found themselves, despite their differences, side by side during World War II, both of them committed to defending the cause of freedom.